Few tax proposals garnered as much bipartisan support during the 2016 presidential campaigns as did "carried interest." Both President Trump and Secretary Clinton, as well as other candidates such as Governors Bush and Christie, expressed support for ending the capital gains treatment of carried interest.
The focus now shifts to Congress. On May 2, Representative Sander Levin (D-MI), the senior Democratic member of the House Ways and Means Committee (and one of the "fathers" of the carried interest legislative effort), introduced H.R. 2295, the Carried Interest Fairness Act of 2017. On the same day, Senator Tammy Baldwin (D-WI) introduced companion legislation in the Senate (S. 1020). The legislation is identical to legislation that Rep. Levin introduced in 2015 (and similar to legislation he introduced in 2012).
The term "carried interest" generally refers to the fee an investment manager receives on the profits of a fund it manages. Currently, carried interests are taxed on the appreciation of fund assets at capital gains tax rates. Whether the current tax treatment of carried interests is appropriate has been the subject of much debate.
The Levin bill would tax as ordinary income the income of partners performing specified services for an "investment partnership," unless the partner could show that a portion of the partner's return was attributable to invested capital.
The Levin bill would (a) provide an exemption for partners who are C corporations; (b) increase the percentage of active ownership necessary to avoid being classified as an "investment partnership" to 75%; and (c) provide a limited exemption for "qualified family partnerships."
Although the Levin bill is broader in scope than other carried interest proposals (most notably, the proposal included by former Ways and Means Chairman David Camp in his 2014 comprehensive tax reform bill), we believe the tax treatment of carried interests will be addressed as part of comprehensive tax reform. While previous versions of the Levin bill were never considered by a Republican Congress, the election of President Trump—who often mentioned his strong support for the elimination of carried interest during the campaign—coupled with (i) the need for additional revenue and (ii) an opportunity to attract Democratic support for comprehensive tax reform, opens the door to legislative action on this front.